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Uploaded by Joshua Gans

by Martin Byford and Joshua Gans
Preliminary talk: Harvard Research in Industrial Organization Workshop
2nd March 2010
And US Department of Justice (April 2010)

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Martin Byford University of Colorado, Boulder Joshua Gans University of Melbourne

27th April, 2010

Monday, 10 May 2010

Introduction

Introduction

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Introduction

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the intensive margin involves ﬁrms coordinating their strategic actions within the markets in which they come into contact.

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Introduction

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the intensive margin involves ﬁrms coordinating their strategic actions within the markets in which they come into contact. Collusion at the extensive margin involves ﬁrms coordinating their participation across markets in order to avoid coming into contact.

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Introduction

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the intensive margin involves ﬁrms coordinating their strategic actions within the markets in which they come into contact. Collusion at the extensive margin involves ﬁrms coordinating their participation across markets in order to avoid coming into contact. The two forms of collusion can be hard to distinguish where a market can be segmented (e.g., each discrete customer can be a ‘market’).

Collusion at the Extensive Margin

Monday, 10 May 2010

Introduction

Motivating Case

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Motivating Case

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

In 2001, Australian Competition and Consumer Commission took Rural Press and Waikerie to the Federal Court of Australia alleging anti-competitive agreement, exclusionary conduct and abuse of market power.

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Motivating Case

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

In 2001, Australian Competition and Consumer Commission took Rural Press and Waikerie to the Federal Court of Australia alleging anti-competitive agreement, exclusionary conduct and abuse of market power. Matter went all the way to the High Court of Australia with the anticompetitive agreement case upheld.

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Motivating Case

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

In 2001, Australian Competition and Consumer Commission took Rural Press and Waikerie to the Federal Court of Australia alleging anti-competitive agreement, exclusionary conduct and abuse of market power. Matter went all the way to the High Court of Australia with the anticompetitive agreement case upheld. The basic story was one of collusion at the extensive margin.

Collusion at the Extensive Margin

Monday, 10 May 2010

Rural Press and Waikerie

Monday, 10 May 2010

Rural Press and Waikerie

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Rural Press and Waikerie

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Monday, 10 May 2010

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Rural Press and Waikerie

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Monday, 10 May 2010

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Initial Entry

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Initial Entry

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Monday, 10 May 2010

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Introduction

The Threat

The attached copies of pages from The River News were sent to me last week. The Mannum advertising was again evident, which suggests your Waikerie operator, John Pick, is still not focussing on the traditional area of operations. I wanted to formally record my desire to reach an understanding with your family in terms of where each of us focuses our publishing efforts. If you continue to attack in Mannum, a prime readership area of the Murray Valley Standard, it may be we will have to look at expanding our operations into areas that we have not traditionally services [sic]. I thought I would write to you so there could be no misunderstanding our position. I will not bother you again on this subject.

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Ian Law, Rural Press, 7 April 1998
**

Monday, 10 May 2010

Collusion at the Extensive Margin

The Threat

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Monday, 10 May 2010

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The Threat

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Monday, 10 May 2010

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The Response

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Monday, 10 May 2010

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The Response

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Introduction

Bell Atlantic v. Twombly

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

**Bell Atlantic v. Twombly
**

Plaintiffs alleged that local telephone companies following deregulation in 1996, had refrained from entering each others’ geographic markets.

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

**Bell Atlantic v. Twombly
**

Plaintiffs alleged that local telephone companies following deregulation in 1996, had refrained from entering each others’ geographic markets. The US Supreme Court found that “sparse competition among large ﬁrms dominating separate geographical segments of the market could very well signify illegal agreement.”

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

**Bell Atlantic v. Twombly
**

Plaintiffs alleged that local telephone companies following deregulation in 1996, had refrained from entering each others’ geographic markets. The US Supreme Court found that “sparse competition among large ﬁrms dominating separate geographical segments of the market could very well signify illegal agreement.” However, the Baby Bells had been regulated to prevent such competition and so it was not surprising that ‘old habits’ continued.

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

**Bell Atlantic v. Twombly
**

Plaintiffs alleged that local telephone companies following deregulation in 1996, had refrained from entering each others’ geographic markets. The US Supreme Court found that “sparse competition among large ﬁrms dominating separate geographical segments of the market could very well signify illegal agreement.” However, the Baby Bells had been regulated to prevent such competition and so it was not surprising that ‘old habits’ continued. It was argued that the plaintiffs would have to demonstrate that the Baby Bells were sacriﬁcing proﬁts by refraining from such entry.

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

**Bell Atlantic v. Twombly
**

Plaintiffs alleged that local telephone companies following deregulation in 1996, had refrained from entering each others’ geographic markets. The US Supreme Court found that “sparse competition among large ﬁrms dominating separate geographical segments of the market could very well signify illegal agreement.” However, the Baby Bells had been regulated to prevent such competition and so it was not surprising that ‘old habits’ continued. It was argued that the plaintiffs would have to demonstrate that the Baby Bells were sacriﬁcing proﬁts by refraining from such entry. Further, “[T]here is no reason to infer that the companies had agreed among themselves to do what was only natural anyway; so natural, in fact, that if alleging parallel decisions to resist competition were enough to imply an antitrust conspiracy, pleading a §1 violation against almost any group of competing businesses would be a sure thing.”

Monday, 10 May 2010

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin

Introduction

Research Questions

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Research Questions

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

What conditions support collusion at the extensive margin?

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Research Questions

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

What conditions support collusion at the extensive margin? How does the presence of multiple markets facilitate collusion?

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Research Questions

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

What conditions support collusion at the extensive margin? How does the presence of multiple markets facilitate collusion? Can different enforcement mechanisms generate different stability and performance outcomes?

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Research Questions

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

What conditions support collusion at the extensive margin? How does the presence of multiple markets facilitate collusion? Can different enforcement mechanisms generate different stability and performance outcomes? Where can collusion be detected?

Collusion at the Extensive Margin

Monday, 10 May 2010

Introduction

Contrasting Literature

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Contrasting Literature

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications

Fudenberg and Maskin (1986) demonstrated the set of equilibria supported under the folk theorem.

Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Contrasting Literature

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications

Fudenberg and Maskin (1986) demonstrated the set of equilibria supported under the folk theorem. Green and Porter (1984) show that ﬁrms may employ temporary punishments to facilitate collusion in the presence of uncertainty.

Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Contrasting Literature

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications

Fudenberg and Maskin (1986) demonstrated the set of equilibria supported under the folk theorem. Green and Porter (1984) show that ﬁrms may employ temporary punishments to facilitate collusion in the presence of uncertainty. Bernheim and Whinston (1990) show that multi-market contact can facilitate collusion by pooling participation constraints.

Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Contrasting Literature

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications

Fudenberg and Maskin (1986) demonstrated the set of equilibria supported under the folk theorem. Green and Porter (1984) show that ﬁrms may employ temporary punishments to facilitate collusion in the presence of uncertainty. Bernheim and Whinston (1990) show that multi-market contact can facilitate collusion by pooling participation constraints. Edwards (1955): conglomerates have scope to engage in mutual forbearance.

Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Contrasting Literature

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications

Fudenberg and Maskin (1986) demonstrated the set of equilibria supported under the folk theorem. Green and Porter (1984) show that ﬁrms may employ temporary punishments to facilitate collusion in the presence of uncertainty. Bernheim and Whinston (1990) show that multi-market contact can facilitate collusion by pooling participation constraints. Edwards (1955): conglomerates have scope to engage in mutual forbearance. This paper: understand collusion across markets.

Conclusions

Collusion at the Extensive Margin

Monday, 10 May 2010

Introduction

Bernheim-Whinston (1990)

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Bernheim-Whinston (1990)

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Simple intuition: ﬁrms should enter multiple markets to improve cartel stability.

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Bernheim-Whinston (1990)

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Simple intuition: ﬁrms should enter multiple markets to improve cartel stability. Complication: requires some combination of non-identical ﬁrms, markets and non-constant returns to scale.

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Bernheim-Whinston (1990)

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Simple intuition: ﬁrms should enter multiple markets to improve cartel stability. Complication: requires some combination of non-identical ﬁrms, markets and non-constant returns to scale. That is, multi-market contact is irrelevant with identical ﬁrms, markets and constant returns to scale.

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Bernheim-Whinston (1990)

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Simple intuition: ﬁrms should enter multiple markets to improve cartel stability. Complication: requires some combination of non-identical ﬁrms, markets and non-constant returns to scale. That is, multi-market contact is irrelevant with identical ﬁrms, markets and constant returns to scale. Did not consider the possibility that collusion might involve market forbearance.

Collusion at the Extensive Margin

Monday, 10 May 2010

Introduction

Outline

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Outline

Basic model set-up: multi-contest environment Use Markov Perfect Equilibrium Add ‘observable friction’ to entry/exit decision for simple history dependence

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Outline

Basic model set-up: multi-contest environment Use Markov Perfect Equilibrium Add ‘observable friction’ to entry/exit decision for simple history dependence Results Competitive equilibrium Collusive equilibrium Multi-lateral enforcement Proportionate Response Key Feature: punishment not costly Uncertainty over state Proportionate Response higher expected return than other enforcement mechanisms Policy implications for detection of collusive behaviour

Monday, 10 May 2010

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin

Introduction

Primitives

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Primitives

A set I = {1,…, I} of ﬁrms.

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Primitives

A set I = {1,…, I} of ﬁrms. A set N = {1,…, N} of distinct markets or separable market segments.

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Primitives

A set I = {1,…, I} of ﬁrms. A set N = {1,…, N} of distinct markets or separable market segments. Oligopolistic proﬁt to a ﬁrm in a market with m participants: π*(m).

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Primitives

A set I = {1,…, I} of ﬁrms. A set N = {1,…, N} of distinct markets or separable market segments. Oligopolistic proﬁt to a ﬁrm in a market with m participants: π*(m). Inﬁnite number of periods.

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Primitives

A set I = {1,…, I} of ﬁrms. A set N = {1,…, N} of distinct markets or separable market segments. Oligopolistic proﬁt to a ﬁrm in a market with m participants: π*(m). Inﬁnite number of periods. All ﬁrms have identical discount factor, δ.

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Primitives

A set I = {1,…, I} of ﬁrms. A set N = {1,…, N} of distinct markets or separable market segments. Oligopolistic proﬁt to a ﬁrm in a market with m participants: π*(m). Inﬁnite number of periods. All ﬁrms have identical discount factor, δ. Note: In paper, markets and ﬁrms can be heterogeneous.

Monday, 10 May 2010

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin

Introduction

Basics

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Basics

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Each market is modelled as a repeated simultaneous moves noncooperative game.

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Basics

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Each market is modelled as a repeated simultaneous moves noncooperative game. Assumption 1: In a one shot game each market produces a unique (expected) equilibrium payoff vector for each proﬁle of participation.

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Timing

Monday, 10 May 2010

Timing

Period t

Monday, 10 May 2010

Timing

Transition Stage

Period t

Monday, 10 May 2010

Timing

Transition Stage

Period t

State Revealed

Monday, 10 May 2010

Timing

Transition Stage

Market Stage

Period t

State Revealed

Monday, 10 May 2010

Timing

Transition Stage

Market Stage Instantaneous Proﬁts Realised

Period t

State Revealed

Monday, 10 May 2010

Introduction

The Transition Stage

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

The Transition Stage

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications

In the transition stage ﬁrm’s simultaneously select the subset of markets in which they wish to pursue a presence.

Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

The Transition Stage

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications

In the transition stage ﬁrm’s simultaneously select the subset of markets in which they wish to pursue a presence. Following the transition stage each ﬁrm’s participation in a market is represented by one of four states.

Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

The Transition Stage

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications

In the transition stage ﬁrm’s simultaneously select the subset of markets in which they wish to pursue a presence. Following the transition stage each ﬁrm’s participation in a market is represented by one of four states. Absence: The player is not engaged in the contest.

Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

The Transition Stage

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications

In the transition stage ﬁrm’s simultaneously select the subset of markets in which they wish to pursue a presence. Following the transition stage each ﬁrm’s participation in a market is represented by one of four states. Absence: The player is not engaged in the contest. Entry: The player is in the process of entering the contest.

Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

The Transition Stage

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications

In the transition stage ﬁrm’s simultaneously select the subset of markets in which they wish to pursue a presence. Following the transition stage each ﬁrm’s participation in a market is represented by one of four states. Absence: The player is not engaged in the contest. Entry: The player is in the process of entering the contest. Presence: The player is an active participant in the contest.

Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

The Transition Stage

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications

In the transition stage ﬁrm’s simultaneously select the subset of markets in which they wish to pursue a presence. Following the transition stage each ﬁrm’s participation in a market is represented by one of four states. Absence: The player is not engaged in the contest. Entry: The player is in the process of entering the contest. Presence: The player is an active participant in the contest. Exit: The player is in the process of exiting the contest.

Conclusions

Collusion at the Extensive Margin

Monday, 10 May 2010

Monday, 10 May 2010

Absence

Monday, 10 May 2010

Absence

Monday, 10 May 2010

Absence

Entry

Monday, 10 May 2010

Absence

Entry

Presence

Monday, 10 May 2010

Absence

Entry

Presence

Exit

Monday, 10 May 2010

Absence

Entry

Presence

Exit

Monday, 10 May 2010

Absence

Entry

Presence

Exit

Monday, 10 May 2010

Absence

Entry

Presence

Exit

Monday, 10 May 2010

Absence

Entry

Presence

Exit

Monday, 10 May 2010

Introduction

The Market Stage

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

The Market Stage

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

A ﬁrm participates in every market in which it has a presence or is in the process of exiting.

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

The Market Stage

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

A ﬁrm participates in every market in which it has a presence or is in the process of exiting. Lemma 1: In a Markov perfect equilibrium (MPE) each ﬁrm takes its static Nash equilibrium action in the market stage, subject to the prevailing proﬁle of participation.

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

The Market Stage

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

A ﬁrm participates in every market in which it has a presence or is in the process of exiting. Lemma 1: In a Markov perfect equilibrium (MPE) each ﬁrm takes its static Nash equilibrium action in the market stage, subject to the prevailing proﬁle of participation. Initially we assume that markets are identical, separable and symmetric.

Collusion at the Extensive Margin

Monday, 10 May 2010

Introduction

Instantaneous Proﬁt Assumptions

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Instantaneous Proﬁt Assumptions

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Assumption 2 (Expansion Incentive): Entry into an additional market is alway proﬁtable for a ﬁrm, holding the participation of the remaining ﬁrms constant.

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Instantaneous Proﬁt Assumptions

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Assumption 2 (Expansion Incentive): Entry into an additional market is alway proﬁtable for a ﬁrm, holding the participation of the remaining ﬁrms constant. The MPE instantaneous proﬁt π*(m) > 0 for all m ≤ I.

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Instantaneous Proﬁt Assumptions

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Assumption 2 (Expansion Incentive): Entry into an additional market is alway proﬁtable for a ﬁrm, holding the participation of the remaining ﬁrms constant. The MPE instantaneous proﬁt π*(m) > 0 for all m ≤ I. Proposition 1 (Competitive Equilibrium): Where assumptions 1 and 2 holds it is an MPE for all ﬁrms to enter and remain in every market.

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Instantaneous Proﬁt Assumptions

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Assumption 2 (Expansion Incentive): Entry into an additional market is alway proﬁtable for a ﬁrm, holding the participation of the remaining ﬁrms constant. The MPE instantaneous proﬁt π*(m) > 0 for all m ≤ I. Proposition 1 (Competitive Equilibrium): Where assumptions 1 and 2 holds it is an MPE for all ﬁrms to enter and remain in every market.

m MPE instantaneous proﬁts satisfy π (m) > π ∗ (m + 1). m+1

∗

Collusion at the Extensive Margin

Monday, 10 May 2010

Introduction

Collusive Equilibrium

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Collusive Equilibrium

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Where collusion takes place at the extensive margin a collusive agreement has two components:

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Collusive Equilibrium

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Where collusion takes place at the extensive margin a collusive agreement has two components: A partition Q of the set N of markets that either assigns a market to a ﬁrm or to a contested partition in which all ﬁrms participate. A collusive partition is characterised by the number of markets ni in each ﬁrm i’s component of the partition.

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Collusive Equilibrium

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Where collusion takes place at the extensive margin a collusive agreement has two components: A partition Q of the set N of markets that either assigns a market to a ﬁrm or to a contested partition in which all ﬁrms participate. A collusive partition is characterised by the number of markets ni in each ﬁrm i’s component of the partition. An enforcement mechanism that utilises the threat of reciprocal entry to counter the expansion incentive.

Collusion at the Extensive Margin

Monday, 10 May 2010

Introduction

Grim-Strategy Equilibrium

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

π (1) > I π (I )

* *

δ ≥δ

GS

* ⎡ ⎤ ∑ j ≠i n jπ (2) ⎥ = max i ⎢ * * * * ⎢ ni (π (1) − π (I )) + ∑ j ≠i n j (π (2) − π (I )) ⎥ ⎣ ⎦

Collusion at the Extensive Margin

Monday, 10 May 2010

Introduction

**Grim-Strategy Equilibrium
**

Suppose that if one ﬁrm enters another ﬁrm’s market, all ﬁrms enter all markets forever.

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

π (1) > I π (I )

* *

δ ≥δ

GS

* ⎡ ⎤ ∑ j ≠i n jπ (2) ⎥ = max i ⎢ * * * * ⎢ ni (π (1) − π (I )) + ∑ j ≠i n j (π (2) − π (I )) ⎥ ⎣ ⎦

Collusion at the Extensive Margin

Monday, 10 May 2010

Introduction

**Grim-Strategy Equilibrium
**

Suppose that if one ﬁrm enters another ﬁrm’s market, all ﬁrms enter all markets forever. There exists a δ ∈ (0, 1) such that the partition Q can be supported by multilateral enforcement if and only if for all i ∈ I,

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

π (1) > I π (I )

* *

δ ≥δ

GS

* ⎡ ⎤ ∑ j ≠i n jπ (2) ⎥ = max i ⎢ * * * * ⎢ ni (π (1) − π (I )) + ∑ j ≠i n j (π (2) − π (I )) ⎥ ⎣ ⎦

Collusion at the Extensive Margin

Monday, 10 May 2010

Introduction

Multi-Markets

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Multi-Markets

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Does multi-market contact facilitate collusion more than multi-market avoidance?

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Multi-Markets

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Does multi-market contact facilitate collusion more than multi-market avoidance? Bernheim-Whinston (1990): depends on ﬁrm/market asymmetries

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Multi-Markets

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Does multi-market contact facilitate collusion more than multi-market avoidance? Bernheim-Whinston (1990): depends on ﬁrm/market asymmetries Here, when products are close substitutes, lower discount factors support collusion at the extensive margin than collusion at the intensive margin.

Collusion at the Extensive Margin

Monday, 10 May 2010

Introduction

Targeted Enforcement

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Targeted Enforcement

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the extensive margin invites a richer set of enforcement mechanisms that are (a) temporary and (b) target infringers more directly.

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Targeted Enforcement

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the extensive margin invites a richer set of enforcement mechanisms that are (a) temporary and (b) target infringers more directly. When there is uncertainty, we can demonstrate that targeted enforcement is both more stable and more proﬁtable. This provides a rationale for proportional response.

Collusion at the Extensive Margin

Monday, 10 May 2010

Monday, 10 May 2010

Partitioning Contests

Firm 1 Firm 2

Contested

Firm 3

Monday, 10 May 2010

Introduction

Multilateral Enforcement

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Multilateral Enforcement

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Multilateral enforcement requires a deviation to be punished by temporary reversion to the competitive equilibrium.

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Multilateral Enforcement

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Multilateral enforcement requires a deviation to be punished by temporary reversion to the competitive equilibrium. If at least one ﬁrm is entering or present in another ﬁrm’s market, and at least one ﬁrm is not entering or present in every market, then all ﬁrms enter every market.

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Multilateral Enforcement

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Multilateral enforcement requires a deviation to be punished by temporary reversion to the competitive equilibrium. If at least one ﬁrm is entering or present in another ﬁrm’s market, and at least one ﬁrm is not entering or present in every market, then all ﬁrms enter every market. Otherwise all ﬁrms withdraw from every market belonging to a rival player.

Collusion at the Extensive Margin

Monday, 10 May 2010

Monday, 10 May 2010

Initial Deviation (t = 1)

Firm 1 Firm 2

Contested

Firm 3

Monday, 10 May 2010

Initial Deviation (t = 1)

Firm 1 Firm 2

E Contested

Firm 3

Monday, 10 May 2010

**Tit-for-Tat Response (t = 2)
**

Firm 1 Firm 2

P Contested

Firm 3

Monday, 10 May 2010

**Tit-for-Tat Response (t = 2)
**

Firm 1 E P E E Contested E E Firm 3 Firm 2

E

E E E

E

Monday, 10 May 2010

E

**Tit-for-Tat Response (t = 2)
**

Firm 1 Firm 2 Firm 3

Monday, 10 May 2010

**Tit-for-Tat Response (t = 2)
**

Firm 1 Firm 2 Firm 3

Gain in Period 2

π ∗ (2)

Monday, 10 May 2010

**Tit-for-Tat Response (t = 2)
**

Firm 1 Firm 2 Firm 3

Gain in Period 2

π ∗ (2)

Loss in Period 2

π ∗ (1) − π ∗ (2)

Monday, 10 May 2010

Withdrawal (t = 3)

Firm 1 w w w w Contested w w Firm 3 Firm 2

w

w w w

w

Monday, 10 May 2010

w

**Tit-for-Tat Response (t = 2)
**

Firm 1 Firm 2 Firm 3

Gain in Period 2

π ∗ (2)

Loss in Period 2

π ∗ (1) − π ∗ (2)

Monday, 10 May 2010

**Tit-for-Tat Response (t = 2)
**

Firm 1 Firm 2 Firm 3

Gain in Period 2

π ∗ (2)

Loss in Period 2

π ∗ (1) − π ∗ (2) 4π ∗ (3) 4π ∗ (3) 4π ∗ (3)

Gain in Period 3

Monday, 10 May 2010

**Tit-for-Tat Response (t = 2)
**

Firm 1 Firm 2 Firm 3

Gain in Period 2

π ∗ (2)

Loss in Period 2

π ∗ (1) − π ∗ (2) 4π ∗ (3) ∗ ∗ 2 π (1) − π (3) 4π ∗ (3) ∗ ∗ 2 π (1) − π (3) 4π ∗ (3) ∗ ∗ 2 π (1) − π (3)

Gain in Period 3

Loss in Period 3

Monday, 10 May 2010

Equilibrium Path (t > 3)

Firm 1 Firm 2

Contested

Firm 3

Monday, 10 May 2010

Introduction

Stability Conditions

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Stability Conditions

The worst case deviation occurs where the ﬁrm with the fewest markets deviates by entering all markets belonging to rival ﬁrms.

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Stability Conditions

The worst case deviation occurs where the ﬁrm with the fewest markets deviates by entering all markets belonging to rival ﬁrms. There exists a δ ∈ (0, 1) such that the partition Q can be supported by multilateral enforcement if and only if for all i ∈ I,

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Stability Conditions

The worst case deviation occurs where the ﬁrm with the fewest markets deviates by entering all markets belonging to rival ﬁrms. There exists a δ ∈ (0, 1) such that the partition Q can be supported by multilateral enforcement if and only if for all i ∈ I,

j=i

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

nj π (2) + π (I) < ni π (1) − π (I) .

∗

∗

∗

∗

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Stability Conditions

The worst case deviation occurs where the ﬁrm with the fewest markets deviates by entering all markets belonging to rival ﬁrms. There exists a δ ∈ (0, 1) such that the partition Q can be supported by multilateral enforcement if and only if for all i ∈ I,

j=i

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

nj π (2) + π (I) < ni π (1) − π (I) . nj π ∗ (2) j=i = max i∈I ni π ∗ (1) − nj π ∗ (I) j∈I

∗

∗

∗

∗

δ ≥ δM L

Collusion at the Extensive Margin

Monday, 10 May 2010

Introduction

Non-Critical Assumptions

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Non-Critical Assumptions

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Identical Markets: Instantaneous proﬁts in a market are insensitive to the market’s label.

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Non-Critical Assumptions

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Identical Markets: Instantaneous proﬁts in a market are insensitive to the market’s label. Symmetry: Instantaneous proﬁts in a market are insensitive to the identity of ﬁrms.

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Non-Critical Assumptions

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Identical Markets: Instantaneous proﬁts in a market are insensitive to the market’s label. Symmetry: Instantaneous proﬁts in a market are insensitive to the identity of ﬁrms. Separable Markets: Instantaneous proﬁts in a market are independent of actions taken in any other market.

Collusion at the Extensive Margin

Monday, 10 May 2010

Introduction

Critical Assumptions

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Critical Assumptions

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Assumption 1: In a one shot game each market produces a unique (expected) equilibrium payoff vector for each proﬁle of participation.

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Critical Assumptions

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Assumption 1: In a one shot game each market produces a unique (expected) equilibrium payoff vector for each proﬁle of participation. Assumption 2 (Expansion Incentive): Entry into an additional market is alway proﬁtable for a ﬁrm, holding the participation of the remaining ﬁrms constant.

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Heavy-Handed Enforcement

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Heavy-Handed Enforcement

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

The heavy-handed enforcement mechanism treats each pair of ﬁrms independently.

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Heavy-Handed Enforcement

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

The heavy-handed enforcement mechanism treats each pair of ﬁrms independently. For each pair of ﬁrms {i, j}, if ﬁrm i is entering or present in at least one of ﬁrm j’s markets, and ﬁrms i and j are not entering or present in all of each others markets, then both ﬁrms enter all of each others markets.

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Heavy-Handed Enforcement

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

The heavy-handed enforcement mechanism treats each pair of ﬁrms independently. For each pair of ﬁrms {i, j}, if ﬁrm i is entering or present in at least one of ﬁrm j’s markets, and ﬁrms i and j are not entering or present in all of each others markets, then both ﬁrms enter all of each others markets. Otherwise ﬁrms i and j withdraw from every market belonging to the other player.

Collusion at the Extensive Margin

Monday, 10 May 2010

Monday, 10 May 2010

Initial Deviation (t = 1)

Firm 1 Firm 2

Contested

Firm 3

Monday, 10 May 2010

Initial Deviation (t = 1)

Firm 1 Firm 2

E Contested

Firm 3

Monday, 10 May 2010

**Tit-for-Tat Response (t = 2)
**

Firm 1 Firm 2

P Contested

Firm 3

Monday, 10 May 2010

**Tit-for-Tat Response (t = 2)
**

Firm 1 Firm 2

P E Contested E

E

Firm 3

Monday, 10 May 2010

**Tit-for-Tat Response (t = 2)
**

Firm 1 Firm 2 Firm 3

Monday, 10 May 2010

**Tit-for-Tat Response (t = 2)
**

Firm 1 Firm 2 Firm 3

Gain in Period 2

π ∗ (2)

Loss in Period 2

π ∗ (1) − π ∗ (2)

Monday, 10 May 2010

Withdrawal (t = 3)

Firm 1 Firm 2

w w Contested w

w

Firm 3

Monday, 10 May 2010

**Tit-for-Tat Response (t = 2)
**

Firm 1 Firm 2 Firm 3

Gain in Period 2

π ∗ (2)

Loss in Period 2

π ∗ (1) − π ∗ (2)

Monday, 10 May 2010

**Tit-for-Tat Response (t = 2)
**

Firm 1 Firm 2 Firm 3

Gain in Period 2

π ∗ (2)

Loss in Period 2

π ∗ (1) − π ∗ (2) 2π ∗ (2) 2π ∗ (2)

Gain in Period 3

Monday, 10 May 2010

**Tit-for-Tat Response (t = 2)
**

Firm 1 Firm 2 Firm 3

Gain in Period 2

π ∗ (2)

Loss in Period 2

π ∗ (1) − π ∗ (2) 2π ∗ (2) ∗ ∗ 2 π (1) − π (2) 2π ∗ (2) ∗ ∗ 2 π (1) − π (2)

Gain in Period 3

Loss in Period 3

Monday, 10 May 2010

Equilibrium Path (t > 3)

Firm 1 Firm 2

Contested

Firm 3

Monday, 10 May 2010

Introduction

Stability Conditions

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Stability Conditions

The worst case deviation occurs where the ﬁrm with the fewest markets deviates by entering all markets belonging to a subset of rival ﬁrms.

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Stability Conditions

The worst case deviation occurs where the ﬁrm with the fewest markets deviates by entering all markets belonging to a subset of rival ﬁrms. There exists a δ ∈ (0,1) such that the partition Q can be supported by multilateral enforcement if and only if for all i ∈ I and K ⊆ I \{i},

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Stability Conditions

The worst case deviation occurs where the ﬁrm with the fewest markets deviates by entering all markets belonging to a subset of rival ﬁrms. There exists a δ ∈ (0,1) such that the partition Q can be supported by multilateral enforcement if and only if for all i ∈ I and K ⊆ I \{i},

1 ∗ ∗ nj π (2) < ni π (1) − π (K + 1) . 2

∗

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

j∈K

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Stability Conditions

The worst case deviation occurs where the ﬁrm with the fewest markets deviates by entering all markets belonging to a subset of rival ﬁrms. There exists a δ ∈ (0,1) such that the partition Q can be supported by multilateral enforcement if and only if for all i ∈ I and K ⊆ I \{i},

1 ∗ ∗ nj π (2) < ni π (1) − π (K + 1) . 2

∗

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

j∈K

δ≥δ

HH

= max

i∈I

K⊆I\{i}

max

nj π (2) ni π ∗ (1) − π ∗ (K + 1) − j∈K nj π ∗ (2)

j∈K

∗

Collusion at the Extensive Margin

Monday, 10 May 2010

Introduction

Proportional Response Enforcement

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Proportional Response Enforcement

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications

The heavy-handed enforcement mechanism treats each pair of ﬁrms independently as well as scaling punishments to the initial transgression.

Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Proportional Response Enforcement

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications

The heavy-handed enforcement mechanism treats each pair of ﬁrms independently as well as scaling punishments to the initial transgression. For each pair of ﬁrms {i, j}, if ﬁrm i is entering or present in at least one of ﬁrm j’s markets, and ﬁrms i and j are not entering or present in an equal number of each others markets, then the ﬁrm in the fewest of its rival’s contests enters additional contests sufﬁcient to equalise cross participation.

Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Proportional Response Enforcement

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications

The heavy-handed enforcement mechanism treats each pair of ﬁrms independently as well as scaling punishments to the initial transgression. For each pair of ﬁrms {i, j}, if ﬁrm i is entering or present in at least one of ﬁrm j’s markets, and ﬁrms i and j are not entering or present in an equal number of each others markets, then the ﬁrm in the fewest of its rival’s contests enters additional contests sufﬁcient to equalise cross participation. Otherwise ﬁrms i and j withdraw from every market belonging to the other player.

Conclusions

Collusion at the Extensive Margin

Monday, 10 May 2010

Monday, 10 May 2010

Initial Deviation (t = 1)

Firm 1 Firm 2

Contested

Firm 3

Monday, 10 May 2010

Initial Deviation (t = 1)

Firm 1 Firm 2

E Contested

Firm 3

Monday, 10 May 2010

**Tit-for-Tat Response (t = 2)
**

Firm 1 Firm 2

P Contested

Firm 3

Monday, 10 May 2010

**Tit-for-Tat Response (t = 2)
**

Firm 1 Firm 2

P E Contested

Firm 3

Monday, 10 May 2010

**Tit-for-Tat Response (t = 2)
**

Firm 1 Firm 2 Firm 3

Monday, 10 May 2010

**Tit-for-Tat Response (t = 2)
**

Firm 1 Firm 2 Firm 3

Gain in Period 2

π ∗ (2)

Loss in Period 2

π ∗ (1) − π ∗ (2)

Monday, 10 May 2010

Withdrawal (t = 3)

Firm 1 Firm 2

w w Contested

Firm 3

Monday, 10 May 2010

**Tit-for-Tat Response (t = 2)
**

Firm 1 Firm 2 Firm 3

Gain in Period 2

π ∗ (2)

Loss in Period 2

π ∗ (1) − π ∗ (2)

Monday, 10 May 2010

**Tit-for-Tat Response (t = 2)
**

Firm 1 Firm 2 Firm 3

Gain in Period 2

π ∗ (2)

Loss in Period 2

π ∗ (1) − π ∗ (2) π ∗ (2) π ∗ (2)

Gain in Period 3

Monday, 10 May 2010

**Tit-for-Tat Response (t = 2)
**

Firm 1 Firm 2 Firm 3

Gain in Period 2

π ∗ (2)

Loss in Period 2

π ∗ (1) − π ∗ (2) π ∗ (2) π ∗ (2)

Gain in Period 3

Loss in Period 3

π ∗ (1) − π ∗ (2)

π ∗ (1) − π ∗ (2)

Monday, 10 May 2010

Equilibrium Path (t > 3)

Firm 1 Firm 2

Contested

Firm 3

Monday, 10 May 2010

Introduction

Stability Conditions

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Stability Conditions

The worst case deviation occurs where the ﬁrm with the fewest markets deviates by entering all markets belonging to a subset of rival ﬁrms.

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Stability Conditions

The worst case deviation occurs where the ﬁrm with the fewest markets deviates by entering all markets belonging to a subset of rival ﬁrms. There exists a δ ∈ (0,1) such that the partition Q can be supported by multilateral enforcement if and only if for all i ∈ I and K ⊆ I \{i},

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Stability Conditions

The worst case deviation occurs where the ﬁrm with the fewest markets deviates by entering all markets belonging to a subset of rival ﬁrms. There exists a δ ∈ (0,1) such that the partition Q can be supported by multilateral enforcement if and only if for all i ∈ I and K ⊆ I \{i},

1 ∗ ∗ nj π (2) < ni π (1) − π (K + 1) . 2

∗

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

j∈K

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Stability Conditions

The worst case deviation occurs where the ﬁrm with the fewest markets deviates by entering all markets belonging to a subset of rival ﬁrms. There exists a δ ∈ (0,1) such that the partition Q can be supported by multilateral enforcement if and only if for all i ∈ I and K ⊆ I \{i},

1 ∗ ∗ nj π (2) < ni π (1) − π (K + 1) . 2

∗

K⊆I\{i}

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

j∈K

δ≥δ

PR

= max

i∈I

max

nj π (2) ∗ (1) − π ∗ (K + 1) − ni π nj π ∗ (2) j∈K

j∈K

∗

Collusion at the Extensive Margin

Monday, 10 May 2010

Introduction

Robustness

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Robustness

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

δM L

nj π ∗ (2) j=i = max ∗ (1) − π ∗ (I) − i∈I ni π nj π ∗ (I) j=i

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Robustness

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

δM L

nj π ∗ (2) j=i = max ∗ (1) − π ∗ (I) − i∈I ni π nj π ∗ (I) j=i

δ HH = δ P R

nj π ∗ (2) j=i ≥ max ∗ (1) − π ∗ (I) − i∈I ni π nj π ∗ (2) j=i

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Uncertainty and Tit-for-Tat Enforcement

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

**Uncertainty and Tit-for-Tat Enforcement
**

Suppose that with some small probability the state is mis-reported following the transition stage. Suppose further that the mis-reported signal is commonly observed and that ﬁrms condition their play on the observed signal even when they know it to be false.

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

**Uncertainty and Tit-for-Tat Enforcement
**

Suppose that with some small probability the state is mis-reported following the transition stage. Suppose further that the mis-reported signal is commonly observed and that ﬁrms condition their play on the observed signal even when they know it to be false. The expected cost to ﬁrms of a false signal is highest under multilateral enforcement and lowest under proportional response enforcement. It follows that proportional response enforcement is payoff dominant.

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

**Uncertainty and Tit-for-Tat Enforcement
**

Suppose that with some small probability the state is mis-reported following the transition stage. Suppose further that the mis-reported signal is commonly observed and that ﬁrms condition their play on the observed signal even when they know it to be false. The expected cost to ﬁrms of a false signal is highest under multilateral enforcement and lowest under proportional response enforcement. It follows that proportional response enforcement is payoff dominant. Nevertheless, multilateral enforcement may be stable where proportional response enforcement is not.

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

**Uncertainty and Tit-for-Tat Enforcement
**

Suppose that with some small probability the state is mis-reported following the transition stage. Suppose further that the mis-reported signal is commonly observed and that ﬁrms condition their play on the observed signal even when they know it to be false. The expected cost to ﬁrms of a false signal is highest under multilateral enforcement and lowest under proportional response enforcement. It follows that proportional response enforcement is payoff dominant. Nevertheless, multilateral enforcement may be stable where proportional response enforcement is not. (Caveat: It is possible to design perverse systems of uncertainty where these results do not hold.)

Monday, 10 May 2010

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin

Introduction

Stability

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Stability

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Uncertainty may be less of a factor at the extensive margin as participation decisions are often easier to verify than strategic actions within a market.

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Stability

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Uncertainty may be less of a factor at the extensive margin as participation decisions are often easier to verify than strategic actions within a market. Markov perfect collusion may survive changes in ﬁrm management or ownership that have the effect of erasing the history of the game.

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Stability

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Uncertainty may be less of a factor at the extensive margin as participation decisions are often easier to verify than strategic actions within a market. Markov perfect collusion may survive changes in ﬁrm management or ownership that have the effect of erasing the history of the game. Collusion at the extensive margin can be facilitated by a smaller group of agents than multi-market collusion.

Collusion at the Extensive Margin

Monday, 10 May 2010

Management Complicity in Multi-Market Collusion

Monday, 10 May 2010

Management Complicity in Multi-Market Collusion

Firm Level

Monday, 10 May 2010

Management Complicity in Multi-Market Collusion

Firm Level

Vic

Tas

Qld

NT

WA

NSW

SA

Monday, 10 May 2010

**Management Complicity in Extensive Margin Collusion
**

Firm Level

WA

NSW

SA

Monday, 10 May 2010

**Management Complicity in Extensive Margin Collusion
**

Firm Level

WA Monopoly

NSW

SA Monopoly

Monday, 10 May 2010

**Management Complicity in Extensive Margin Collusion
**

Firm Level

WA Monopoly

NSW Competitive

SA Monopoly

Monday, 10 May 2010

Introduction

Detecting Collusion

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Detecting Collusion

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications

Collusion at the extensive margin is an act of omission.

Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Detecting Collusion

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications

Collusion at the extensive margin is an act of omission. Is the ﬁrm capable of contesting the market?

Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Detecting Collusion

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications

Collusion at the extensive margin is an act of omission. Is the ﬁrm capable of contesting the market? Would contesting the market be proﬁtable?

Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Detecting Collusion

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications

Collusion at the extensive margin is an act of omission. Is the ﬁrm capable of contesting the market? Would contesting the market be proﬁtable? Collusion at the extensive margin does not necessarily imply cooperation between ﬁrms. This model can be interpreted as a model of standoffs (such as the cold war).

Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Detecting Collusion

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications

Collusion at the extensive margin is an act of omission. Is the ﬁrm capable of contesting the market? Would contesting the market be proﬁtable? Collusion at the extensive margin does not necessarily imply cooperation between ﬁrms. This model can be interpreted as a model of standoffs (such as the cold war). Collusion may occur in places we would not usually think to look.

Conclusions

Collusion at the Extensive Margin

Monday, 10 May 2010

Beer or Soft Drink Market

Monday, 10 May 2010

Beer or Soft Drink Market

Retail Sales

Monday, 10 May 2010

Beer or Soft Drink Market

Restaurant Chain A Restaurant Chain B

Retail Sales

Restaurant Chain C

Monday, 10 May 2010

Beer or Soft Drink Market

Restaurant Chain A Bar A Bar B Restaurant Chain B

Retail Sales

Restaurant Chain C

Monday, 10 May 2010

Beer or Soft Drink Market

**Restaurant Chain A Bar A Bar B
**

Sports Ground

Restaurant Chain B

Retail Sales

Restaurant Chain C

Entertainment Venue

Monday, 10 May 2010

**Beer or Soft Drink Market
**

Vending Machine Location B

**Restaurant Chain A Bar A Bar B
**

Sports Ground

Vending Machine Location C

Restaurant Chain B

Retail Sales

Vending Machine Location A

Restaurant Chain C

Entertainment Venue

Monday, 10 May 2010

**Beer or Soft Drink Market
**

Vending Machine Location B Convenience Store A

**Restaurant Chain A Bar A Bar B
**

Sports Ground

Vending Machine Location C

Restaurant Chain B

Retail Sales

Convenience Store B Vending Machine Location A

Restaurant Chain C

Entertainment Venue

Monday, 10 May 2010

Collusive Fringe

Firm 1

Convenience Store A Vending Machine Location B Vending Machine Location C

Firm 2

**Restaurant Chain A Bar A Bar B
**

Convenience Store B

Contested

Retail Sales

Restaurant Chain B

Vending Machine Location A

Sports Ground

Restaurant Chain C

Entertainment Venue

Monday, 10 May 2010

Google and the Partitioning of Product Markets

Introduction The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

**Google and the Partitioning of Product Markets
**

Google has achieved a dominant position in search based advertising.

Introduction The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

**Google and the Partitioning of Product Markets
**

Google has achieved a dominant position in search based advertising. Attempts by Google expand its product range have resulted in rival ﬁrms entering (or expanding their presence within) Google’s core market.

Introduction The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

**Google and the Partitioning of Product Markets
**

Google has achieved a dominant position in search based advertising. Attempts by Google expand its product range have resulted in rival ﬁrms entering (or expanding their presence within) Google’s core market. Google’s entry into ofﬁce applications and operating systems was followed by Microsoft’s development of the Bing search engine.

Introduction The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

**Google and the Partitioning of Product Markets
**

Google has achieved a dominant position in search based advertising. Attempts by Google expand its product range have resulted in rival ﬁrms entering (or expanding their presence within) Google’s core market. Google’s entry into ofﬁce applications and operating systems was followed by Microsoft’s development of the Bing search engine. Entry into the mobile device space was followed by Apple’s acquisition of Quattro Wireless.

Introduction The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin

Monday, 10 May 2010

**Google and the Partitioning of Product Markets
**

Google has achieved a dominant position in search based advertising. Attempts by Google expand its product range have resulted in rival ﬁrms entering (or expanding their presence within) Google’s core market. Google’s entry into ofﬁce applications and operating systems was followed by Microsoft’s development of the Bing search engine. Entry into the mobile device space was followed by Apple’s acquisition of Quattro Wireless.

Introduction The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin

Monday, 10 May 2010

Introduction

Predatory Entry

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Predatory Entry

Suppose that the expansion incentive did not hold.

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Predatory Entry

Suppose that the expansion incentive did not hold. For example, one or more markets is a natural monopoly

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Predatory Entry

Suppose that the expansion incentive did not hold. For example, one or more markets is a natural monopoly Grim strategy enforcement is ineffective.

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Predatory Entry

Suppose that the expansion incentive did not hold. For example, one or more markets is a natural monopoly Grim strategy enforcement is ineffective. Suppose Firm 1 has the natural monopoly market while Firm 2 has the duopoly market.

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Predatory Entry

Suppose that the expansion incentive did not hold. For example, one or more markets is a natural monopoly Grim strategy enforcement is ineffective. Suppose Firm 1 has the natural monopoly market while Firm 2 has the duopoly market. If Firm 1 enters 2’s market, Firm 2 will need to use a temporary punishment. That punishment implies price below cost.

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Predatory Entry

Suppose that the expansion incentive did not hold. For example, one or more markets is a natural monopoly Grim strategy enforcement is ineffective. Suppose Firm 1 has the natural monopoly market while Firm 2 has the duopoly market. If Firm 1 enters 2’s market, Firm 2 will need to use a temporary punishment. That punishment implies price below cost. Thus, enforcement requires predatory entry to induce exit from another market.

Monday, 10 May 2010

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin

Introduction

Mergers

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Mergers

Mergers when ﬁrms are colluding at the intensive margin can increase cartel stability

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Mergers

Mergers when ﬁrms are colluding at the intensive margin can increase cartel stability Mergers when ﬁrms are colluding at the extensive margin has an ambiguous effect on cartel stability

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Mergers

Mergers when ﬁrms are colluding at the intensive margin can increase cartel stability Mergers when ﬁrms are colluding at the extensive margin has an ambiguous effect on cartel stability Case 1: Initially symmetric ﬁrms; merger reduces cartel stability

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Mergers

Mergers when ﬁrms are colluding at the intensive margin can increase cartel stability Mergers when ﬁrms are colluding at the extensive margin has an ambiguous effect on cartel stability Case 1: Initially symmetric ﬁrms; merger reduces cartel stability Merger has no effect on collusive proﬁts or the incentive to deviate

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Mergers

Mergers when ﬁrms are colluding at the intensive margin can increase cartel stability Mergers when ﬁrms are colluding at the extensive margin has an ambiguous effect on cartel stability Case 1: Initially symmetric ﬁrms; merger reduces cartel stability Merger has no effect on collusive proﬁts or the incentive to deviate Merger increases proﬁts when there is multi-lateral entry

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Mergers

Mergers when ﬁrms are colluding at the intensive margin can increase cartel stability Mergers when ﬁrms are colluding at the extensive margin has an ambiguous effect on cartel stability Case 1: Initially symmetric ﬁrms; merger reduces cartel stability Merger has no effect on collusive proﬁts or the incentive to deviate Merger increases proﬁts when there is multi-lateral entry Case 2: Merger between two smallest ﬁrms can increase cartel stability

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Mergers

Mergers when ﬁrms are colluding at the intensive margin can increase cartel stability Mergers when ﬁrms are colluding at the extensive margin has an ambiguous effect on cartel stability Case 1: Initially symmetric ﬁrms; merger reduces cartel stability Merger has no effect on collusive proﬁts or the incentive to deviate Merger increases proﬁts when there is multi-lateral entry Case 2: Merger between two smallest ﬁrms can increase cartel stability Merger increases stake in collusion and reduces incentive to deviate

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Mergers

Mergers when ﬁrms are colluding at the intensive margin can increase cartel stability Mergers when ﬁrms are colluding at the extensive margin has an ambiguous effect on cartel stability Case 1: Initially symmetric ﬁrms; merger reduces cartel stability Merger has no effect on collusive proﬁts or the incentive to deviate Merger increases proﬁts when there is multi-lateral entry Case 2: Merger between two smallest ﬁrms can increase cartel stability Merger increases stake in collusion and reduces incentive to deviate but ... still increases proﬁts when there is multi-lateral entry

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Mergers

Mergers when ﬁrms are colluding at the intensive margin can increase cartel stability Mergers when ﬁrms are colluding at the extensive margin has an ambiguous effect on cartel stability Case 1: Initially symmetric ﬁrms; merger reduces cartel stability Merger has no effect on collusive proﬁts or the incentive to deviate Merger increases proﬁts when there is multi-lateral entry Case 2: Merger between two smallest ﬁrms can increase cartel stability Merger increases stake in collusion and reduces incentive to deviate but ... still increases proﬁts when there is multi-lateral entry In general, balance between the fact that the reduction in ﬁrm numbers reduces the severity of punishments that can be put in place against the reduction in the incentive to deviate that comes from consolidation.

Monday, 10 May 2010

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin

Introduction

Conclusions

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Conclusions

Examines collusion at the extensive margin

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Conclusions

Examines collusion at the extensive margin Distinct predictions for multi-market contact

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Conclusions

Examines collusion at the extensive margin Distinct predictions for multi-market contact Rationale for proportionate response

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Conclusions

Examines collusion at the extensive margin Distinct predictions for multi-market contact Rationale for proportionate response Oligopoly with a collusive fringe

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Conclusions

Examines collusion at the extensive margin Distinct predictions for multi-market contact Rationale for proportionate response Oligopoly with a collusive fringe Predatory entry

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Conclusions

Examines collusion at the extensive margin Distinct predictions for multi-market contact Rationale for proportionate response Oligopoly with a collusive fringe Predatory entry Ease of detection

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Conclusions

Examines collusion at the extensive margin Distinct predictions for multi-market contact Rationale for proportionate response Oligopoly with a collusive fringe Predatory entry Ease of detection Future directions

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Conclusions

Examines collusion at the extensive margin Distinct predictions for multi-market contact Rationale for proportionate response Oligopoly with a collusive fringe Predatory entry Ease of detection Future directions Relational contracting

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

**Collusion at the Extensive Margin
**

Monday, 10 May 2010

Introduction

Conclusions

Examines collusion at the extensive margin Distinct predictions for multi-market contact Rationale for proportionate response Oligopoly with a collusive fringe Predatory entry Ease of detection Future directions Relational contracting Trade agreements

The Model Collusive Equilibria Uncertainty Stability Antitrust Implications Conclusions

Collusion at the Extensive Margin

Monday, 10 May 2010

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